What changed
RBI formalized standalone prudential norms for Small Finance Banks on dividend declaration under Section 35A of BR Act, 1949. The directions replace any earlier ad-hoc requirements and set clear eligibility criteria: minimum 9% CRAR for two preceding completed financial years plus the current year, and NNPA ratio below 7% for the current year. A fallback provision allows dividend declaration if CRAR is at least 9% only for the current year, provided NNPA ratio is less than 5%.
What it means for you
Small Finance Banks now have a clear regulatory framework for dividend payouts, reducing ambiguity. The dual CRAR test (two prior years plus current year) ensures sustained capital strength before profit distribution. The NNPA threshold of 7% links dividend eligibility directly to asset quality, incentivizing better NPA management. Banks with borderline capital or high NPAs may need to conserve profits to meet these thresholds.
What you must do
- Review your bank's CRAR for the last two completed financial years and the current year to confirm it meets the 9% minimum.
- Calculate your NNPA ratio for the current financial year and ensure it is below 7% before proposing any dividend.
- Ensure Board discussions on dividend proposals explicitly document consideration of RBI inspection findings on NPA divergence, provisioning shortfalls, and auditor qualifications.
- Update internal dividend policy and reporting systems to align with the new directions and the prescribed reporting format in Annex I.
- If CRAR is below 9% for the prior two years but meets 9% for the current year, evaluate eligibility under the fallback provision (NNPA <5%) and document compliance.
Who it affects
Small Finance Banks (SFBs), Board of Directors of SFBs, Finance and compliance teams of SFBs, RBI supervisory divisions monitoring SFBs
What is the minimum CRAR required for an SFB to declare dividends?
The bank must have a CRAR of at least 9% for the two preceding completed financial years and the financial year for which dividend is proposed. If it fails the two-year test but has 9% CRAR in the current year, it may still be eligible under a fallback provision.
What is the NNPA threshold for dividend declaration?
The Net Non-Performing Asset (NNPA) ratio must be less than 7% for the financial year for which the bank proposes to declare dividend.
What factors must the Board consider before declaring dividends?
The Board must consider interim dividends paid, RBI findings on NPA divergence and provisioning shortfalls, auditor qualifications, minimum regulatory capital requirements, and the bank's long-term growth plans.